Shelley Hanna: An ill-timed drop could cause havoc

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Q. My husband and I are school teachers in our late 20s. We started working five years ago and joined KiwiSaver back then. Our plan is to withdraw as much as we can to buy our first home. I am expecting our first child in January and will be taking two years off work.

We haven't been tracking our KiwiSaver balances up until now but when we compared we discovered quite a difference. I have been in a Mercer fund since I started while my husband was with AMP but switched to the Fisher Growth Fund soon afterwards. He has a balance of $23,200 while I only have $18,800. We are on the same salary scale and are both contributing 3 per cent. Why the difference?

A. The simple answer is that your husband is in a growth fund which has a larger allocation to shares while you are in a default fund which - like all the default funds - is conservative with a much lower allocation to shares.

Markets have been very strong since 2012 and with the increase to 3 per cent for employer and employee contributions from April 2013 investors in the higher risk funds have seen their balances increase significantly compared with lower risk funds.

Did your husband switch to the Fisher Growth fund because he wanted to take more risk with his KiwiSaver? While that is often recommended for younger investors, the downside is that he is planning to withdraw a significant chunk of his money to buy a house within the next few months.

If the markets take a dive between now and settlement day your husband's KiwiSaver could drop by say 10 per cent. He may want to talk to his fund manager about switching to a more conservative fund while you look for a house.

Ideally KiwiSaver home buyers should do this at least 12 months before they start looking as markets can be unpredictable and an ill-timed drop could cause quite an upset to your budget.

You have planned your first home purchase well to maximise the benefits of KiwiSaver. As you have been in the scheme for five years you should qualify for the maximum First Home Deposit Subsidy of $5000 each (note that your combined income at the time you apply must be less than $120,000 p.a.). On top of that you should be able to withdraw about $33,000 from your KiwiSaver accounts (your current balance less Government contributions).

This will be a big help in your first home purchase. Remember that to qualify for the subsidy, first home buyers in Hawke's Bay can only buy a house up to $300,000. Realistically, with you going down to one income for two years this is probably not a bad thing.

While the difference between your KiwiSaver accounts looks quite big, it could have been greater. According to the FundFinder calculator on the Sorted website, of the 199 KiwiSaver funds that they track the top performer has averaged 20.15 per cent per annum after tax and fees while at the other end the lowest return has been just 1.76 per cent per annum.

No prizes for guessing that the fund at the top end is high risk while the other is a low risk cash fund.

The FundFinder calculator is a great, free tool that everyone in KiwiSaver should now be familiar with. It is provided by the Commission for Financial Literacy and Retirement Income - an autonomous Crown entity which works to improve the financial wellbeing of all New Zealanders. FundFinder has extensive information on risk and returns, and guidance on how to choose a KiwiSaver fund that is right for you.

• Shelley Hanna is an authorised financial adviser FSP12241. Her disclosure statement is available on request and free of charge by calling 870 3838 or go to www.peak.net.nz. The information contained in this article is of a general nature and is not personalised. Send your KiwiSaver questions to shelley.hanna@peak.net.nz.